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Monday, April 07, 2008

The trouble with Joe

Ever been to a concert or play where the rest of the audience were in raptures, but you weren't? That's been my experience every time I've gone to hear Joseph Stiglitz speak on globalisation in London. Each time I've come away wondering how such a first rate economist can offer up such populist tropes, sloppy reasoning and pessimistic interpretation of the facts.

So why do his speeches (and books) make me so queasy? It's not that I disagree with most of his policy prescriptions. Like Stiglitz, I was shocked by the incompetence with which the IMF dealt with the Asian currency crisis a decade ago. And like Stiglitz, I would like to see western governments pay greater attention to those among their constituents who most stand to lose from globalisation.

Robert Skidelsky's review of Stiglitz' latest book, Making Globalization Work, makes the case more eloquently than I ever could. Writing in the New York Review of Books, he concludes:

My final criticism is that Stiglitz's book is carelessly written. Stiglitz was—and perhaps still is—an outstanding economic theorist. But
he has been producing big, loosely argued books. The laudable aim
behind them is to inform a broader audience about economic policies
that could make the world a better place, certainly with better lives
for the poor, and such advocacy has its place in moving people to
action. But he lacks the eloquence, urgency, and passion of the
preacher, while he has too often abandoned the rigor of the scientist.
In my view, he has not yet found a style suitable to the popular
exposition of his economic ideas.

Comments

The review of Joe Stiglitz's book by Robert Skidelsky is even sloppier than the book itself. For example, the review states:

"Under the classic gold-standard regime, a deficit country like the United States would have been forced to curtail its living standard in order to regain competitiveness. In the present nonsystem, it can live for years beyond its means, at the sacrifice of its competitiveness."

Offshoring lower quality jobs for higher quality jobs increases competitiveness, along with reducing the gap of living "beyond its means," and the flexible exchange rate system is not a "nonsystem." Also, the review often gives only one cause to explain an effect.

I disagree with many of Stiglitz's causes of global imbalances. However, I agree with his universal accounting standard to include social costs. Not taking into account social costs may give some developing countries a huge unfair advantage. I agree with the statement in the review:

"Resource exploitation is the quickest way for a country to grow, provided the resources aren't stolen. However, natural resources are exhaustible, so unless an economy expands beyond its natural resource base, its capital runs down even as its income grows." (However, depletion may be more appropriate than the Marxist term "exploitation")

Unfortunately, Stiglitz has often politicized the global economy, which is not difficult, given it's complex system.

Also, I may add, the flexible exchange rate system facilitated economic changes. For example, the U.S. auto industry is obsolete, except for larger and luxury autos, including SUVs, trucks, and minivans. A fixed exchange rate system would have slowed U.S. losses, and Toyota's gains, in global market share, which is inevitable. Consequently, limited U.S. resources would have shifted into higher quality/higher paying/more profitable goods more slowly under a fixed exchange rate system. Also, I've stated before: Why go back to the gold standard when it created so many economic boom/bust cycles, including two deep depressions?

We are all careless at times; myself,Skidelsky and Eckart included. The trouble with Joe Stiglitz is different. In his books and articles since the Asian crisis, passion has often crowded out reason. Quite a few of us therefore often find ourselves emphatically behind some of his practical propositions, but abhorring the way he presents them. As an author for mass consumption, he badly needs a collaborator or collaborators who can make his advocacy march in step with his intellect.

Diversity, I think you're confusing passion with political or social activism. Also, economists tend to be specialized, and some are technocrats (e.g. an undergraduate degree in math and a graduate degree in econ). So, it's difficult for many economists to write about economics in a generalized form, particularly when you want to be a perfectionist.

When I was in grad school, I had to hire a Ph.D math tutor, although I completed lots of math credits. The math tutor asked me more questions about econ terminology and theories than I asked about math. So, it was slow going (and I was under a lot of pressure to complete assignments). So, a collaborator may not work.

In undergrad econ, you learn a little about a lot. In grad econ, you learn a lot about a little. I'm sure, Stiglitz typically performs specialized academic work.

The socially active media manipulates the masses by focusing on the negative and turning the positive into the negative, while ignoring 95% of the economy. For example, the loss of millions of U.S. manufacturing jobs is reported as bad. However, the fact that U.S. output expanded with fewer inputs is ignored. Currently, only 13 million U.S. workers are needed to produce $5 trillion a year in U.S. manufacturing output. So, productivity, along with market power, improving terms-of-trade, shifting limited resources into emerging industries, etc. are ignored by the shallow-thinking journalists. However, creating millions of meaningless jobs in income redistribution and expensive green energy are good. Even Jim Jubak is writing negative economic articles, while politically active NeoKeynesians also want more government power over business. No wonder the masses believe the worlds only superpower is in bad shape.

The Real U.S. Economy:

The data show U.S. median family (household) income is $60,000 (half earn more and half earn less). With low interest rates and deflation in the housing market, along with falling prices of many goods, because of "excess" assets and goods, except for many commodities, U.S. living standards rose at a steeper rate. Now, Americans will at least maintain their higher living standards, while income continues to rise.

Y = C + I + G + NX. C will be flat at worst, a falling I (particularly in residential investment) would be the cause of a mild recession, while G continues to rise, and a less negative NX, through the export boom, will add to economic growth. Wage growth will accelerate at the expense of slower profit growth.

Also, I may add, purchasing power parity (PPP), which is becoming more popular to compare GDPs between countries, is accurate only for some commodities. Walmart-China is considered a luxury store. However, China's Wu-Mart, which sells cheaper and lower quality goods, is considered a normal goods store. In India, only seven out of 1,000 people own an auto. Indians cannot afford Toyotas at world prices. However, a new Indian car was created, the Tata Nano, which sells for $2,500 (i.e. using a hard currency at the world price). Below is a link showing the picture of the Nano "luxury version." (You may want to compare it to a Cadillac SUV in second link). There are also differences between countries production mix. For example, E.U. GDP reflects more income redistribution and government goods, while U.S. GDP reflects more new products and household goods.

The article below supports my prior comments about both the U.S. housing market and journalists:

Anomalies Skew Home-Price Data

"If there are a lot more homes sold on the low end and fewer on the high end, the median price is bound to drop dramatically," NAR Chief Economist Lawrence Yun said.

Yun said the S&P/Case-Shiller Index is flawed because "if you focus on down markets you're going to get a downward price. We are disappointed that its very limited market coverage gets such attention."

"Just like saying the average nationwide temperature today is 57 degrees doesn't tell you anything, the same is true for real estate prices," Yun said.

NAR's Yun said the financial media is seizing on gloomy numbers and providing little analysis or historical perspective.

A University of Michigan survey incorporated in the U.S. Index of Leading Economic Indicators last week rang in at its lowest level since November 1982 --when the country was suffering through 10.8% unemployment and the worst recession since the Great Depression.

That 26-year-low confidence mark grabbed headlines nationwide while the Conference Board number that many economists find equally reliable drew far less media attention. Not one journalist who contacted Conference Board Communications Director Frank Tortorici's office Tuesday inquired why there was such an astounding discrepancy, he said.

The S&P/Case-Shiller index, which Tuesday posted a 12.7% decline for February, is skewed for two reasons of its own -- it tracks just 20 major markets, many among the hardest hit, and its "repeat sales" survey by design pulls in individual homes both bought and sold in the last few years. Many of those are now being dumped by distressed homeowners and investors who bought at peak market prices and face higher mortgage-rate adjustments.

The National Association of Realtors(R) Chief Economist Lawrence Yun has been named among the top 10 economic forecasters by USA Today.

Yun was named NAR's chief economist and senior vice president of research in November 2007.

Before joining NAR, Yun worked as an economic consultant to the U.S. Department of Veterans Affairs and the U.S. Department of Education. As a research associate at the University of Maryland, Yun developed the graduate economics curriculum for and taught free-market economics in the former Soviet Union as that country transitioned from communism to a free-market system.

Yun received his Ph.D. in economics from the University of Maryland in 1995. He received a B.S. degree in mechanical engineering from Purdue University in 1987.

Conventional wisdom believes China's economy will overtake the U.S. economy within 20 years. However, I've shown China's low wages (for high profits), negative externalities (or massive social costs), the depreciated dollar (including huge losses in U.S. investment), deteriorating terms-of-trade (along with dumping and smaller gains of trade), production of heavy goods (with higher commodity prices), government intervention (e.g. state owned firms), etc. show China has a poor economic model. China's inflation has also accelerated. See link below. I've stated before, India has a better chance of overtaking China than China has overtaking the U.S. How can so many people be so wrong about China?

China's inflation rebounded in April to near decade-high levels, adding to pressure on Beijing to cool rapid price rises and avert possible unrest ahead of the Summer Olympics, according to official data reported Monday.

Consumer prices in April were up 8.5 percent compared with the same month last year, the National Statistics Bureau reported. That was up from March's 8.3 percent rate and just short of February's 8.7 percent, the highest inflation in 12 years.

Consumer prices have jumped since mid-2007, driven by rises in food costs that hit 22.1 percent in April. The government has been trying to cool price rises for pork, grain and other items by increasing supplies and has imposed controls on basic goods.

Consumer prices in April were up 8.5 percent compared with the same month last year, the National Statistics Bureau reported. That was up from March's 8.3 percent rate and just short of February's 8.7 percent, the highest inflation in 12 years.

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We are all careless at times; myself,Skidelsky and Eckart included. The trouble with Joe Stiglitz is different. In his books and articles since the Asian crisis, passion has often crowded out reason. Quite a few of us therefore often find ourselves emphatically behind some of his practical propositions, but abhorring the way he presents them. As an author for mass consumption, he badly needs a collaborator or collaborators who can make his advocacy march in step with his intellect.

A deficit country like the United States would have been forced to curtail its living standard in order to regain competitiveness. However, I've shown China's low wages (for high profits), negative externalities (or massive social costs), the depreciated dollar (including huge losses in U.S. investment), deteriorating terms-of-trade (along with dumping and smaller gains of trade), production of heavy goods (with higher commodity prices), government intervention (e.g. state owned firms), etc. show China has a poor economic model. China's inflation has also accelerated.

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